What is a Roth IRA? A Short and Simple Guide

Note: This post is part of the Roth IRA Movement event organized by Jeff Rose at Good Financial Cents. Today, dozens of financial bloggers are posting articles about Roth IRAs. This is mine.

Most of us know we should save for retirement, but sometimes it’s tough to get started. If your employer sponsors a retirement plan — especially if it offers a generous match to your contributions — that’s usually the best place to begin. But even if you don’t have a retirement plan through your job, you can still save for the future. One of the best ways to do so is through a Roth IRA.

What Is a Roth IRA?
An IRA is an individual retirement arrangement, a retirement plan that gives you tax advantages when saving for retirement. There are two types of IRAs:

With a traditional IRA, the money you contribute is typically tax-deductible, but the money you pull out at retirement will be taxed at the then-current rate.

With a Roth IRA, you contribute after-tax dollars, but when you retire, you don’t have to pay taxes on the investment returns.

In other words, money in a traditional IRA is taxed when you pull it out, but the money in a Roth IRA is taxed before you put it in.

You make investments in an IRA through an individual retirement account. You have just one Roth IRA, but you can have many Roth IRA accounts. That may sound confusing, but all you really need to know is that you can have a Roth IRA account at your credit union and a different Roth IRA account at your broker, but they’ll both be part of the same individual retirement arrangement. Clear as mud?

It’s important to understand that an IRA isn’t itself an investment — it’s a place to put investments. When you open an IRA account, it’s like an empty bucket waiting to be filled. You might, for instance, buy stocks to put into your bucket, or maybe bonds. Some people use their IRA accounts to invest in real estate, and some simply let their cash sit there, earning interest on certificates of deposit.

Roth IRA Rules and Requirements
There are some restrictions on who can contribute to Roth IRAs. These arrangements are designed to help ordinary working folks to save for retirement by giving them a significant tax break. They’re not meant for people with really high incomes.

For 2012:

If your tax status is single and you earn more than $110,000 but less than $125,000, the amount you can contribute will be limited. If you earn more than $125,000, you can’t contribute to a Roth IRA at all.

If you’re married and filing jointly, your contributions are limited if your household income is more than $173,000. If you and your spouse earn more than $183,000, you can’t contribute to a Roth IRA.

These income limits are based on your modified adjusted gross income. (If you don’t know what that is, don’t worry about it unless you’re close to the limit.) Also note that Roth IRA income limits generally increase every year.

A few other useful facts:

If you’re younger than age 50, you can contribute $5,000 to your Roth IRA in 2012. If you’re over 50, you can contribute up to $6,000.

To invest in a Roth IRA in a given year, you (or your spouse) need to have earned income. In other words, you can’t fund a Roth IRA if all of the money you received that year came from an inheritance.

You can use a Roth IRA even if you have a 401(k) or other retirement plan.

You have longer than you might expect to make your Roth IRA contributions each year — you have until the tax deadline. For instance, if you want to contribute to your 2011 Roth IRA, you still can. You have until April 17th!

You can withdraw your contributions to a Roth IRA at any time without penalty. But if you try to withdraw the earnings (the returns on your contributions) before age 59-1/2, you’ll have to pay taxes and, probably, a 10% early-withdrawal penalty.

Lastly — and this is important for many people — if you’ve had your Roth IRA long enough, you can withdraw up to $10,000 in earnings without penalty in order to buy your first home. (You’re still taxed on that money, though.) Check out this article from The Motley Fool for more info.

There are other guidelines and provisions, but these are the basics. If you want more info, check out Publication 590 at the IRS website or contact your friendly neighborhood financial planner.

How to Open a Roth IRA Account
Opening a Roth IRA account is easy. If you’ve ever filled out a job application, applied for a credit card, or opened a bank account, you’ve got what it takes to open a Roth IRA account.

Deciding where to open your Roth IRA account is the toughest part of the process. If you already have an investment advisor, ask her for recommendations, but look for other options, too. Many banks and credit unions offer IRA accounts (though you’ll usually be able to invest only in deposit accounts, like CDs and savings accounts).

If you’re wiling to make some decisions on your own, you can open an IRA account through a discount broker or mutual fund company. There are a lot of good options out there, but you might start your search with these firms:

I recommend that you set aside an hour or two some Saturday morning to explore the options over a cup of coffee and a bowl of Lucky Charms. With a little research, you should be able to find a company and program that suit your needs. When you’re shopping around for a place to open an IRA account, ask the following questions:

Is there a minimum initial investment?

What sorts of fees will be charged to the account?

Can you make automatic contributions?

What investment options are available?

Are electronic statements available?

Search for a company that suits your needs, but don’t fret about finding a perfect match. Remember: The perfect is the enemy of the good. Find a good match, and then set your IRA account in motion. You can move your money to a new IRA account if the first company you choose isn’t a good fit.

Once you pick a place to open your IRA account, it’s time to fill out the application. Some firms want you to download forms and then mail them back. So 1999! Most places should let you apply online, though. To complete the application, you’ll need your Social Security number, bank account info (so you can transfer funds), info about your current employer, money in a bank account (depending on where you open your Roth IRA account, you might need anywhere from $25 to $3000), and about half an hour of free time.

Some applications will ask a few simple questions about your investment plans and goals. Once you complete the application, you’ll transfer money to your new account. (It’ll probably earn interest until you choose an investment.) That’s all there is to it.

I haven’t mentioned Roth IRAs around here much over the past few years. For one thing, I did a series of articles on the Roth when this site was young. I’ve always just pointed back there. For another, as my own income grew, the Roth was no longer an option. Starting next year, though, I’l be back in Roth IRA land. You can be darn sure I’ll max that sucker out every year. And so should you, if it’s an option.

Do you have a Roth IRA? Where do you have your accounts? What sorts of investments do you put in them? Any advice for newbies who want to open a Roth IRA account but don’t know where to start? Share your advice in the comments below!

I started a Roth IRA when I was 18 years old. I’ve managed to max it out every year for the last 12 years. For the past two, I have had to contribute to a Traditional Non-Deductible IRA first, then convert it to a Roth.

I started my accounts at Scottrade and have kept them there ever since. I got a little disheartened when Vanguard funds dropped off the no-commission list, so I am in the process of switching over to Vanguard exclusively. I have to admit, I’ve been slow on taking action regarding this.

For most people, like me, it’s hard to find the time to research heavily into individual investments. As much as I’d like to, I just can’t invest in individual stocks because I don’t know enough about any particular company to do so.

That’s why I encourage investing in index funds. Besides being low cost, it is a time proven investing strategy for those with a long time horizon.

For those that have a 401k (or other retirement account already), but are lacking a Roth IRA, it’s a great place to store certain types of investments. Particularly, dividend paying stocks/mutual funds, bonds, and cash type investments.

Due to the way the Roth IRA functions, it’s an excellent choice for growing investments that have recurring cash flows. Definitely something to think about when allocating your investments/portfolio across all of your accounts.

If you are unable to contribute to a Roth IRA due to income restrictions, the process of opening a non-deductible IRA and converting to a Roth IRA without incurring taxes is easier than it looks. I have written a step-by-step guide of how to do this.

I opened a Roth IRA through ING with eight bucks!! There are apparently no minimum balance requirements to open an IRA through ING. The money’s just in a basic savings account for the time being. I add a few bucks here and there as I’m able.

I feel like I’m ignorant asking this here, but how do I know if I should have a Roth (or switch to one) over my 457 (or 403B or 401K)? I am a public employee, don’t get matching funds to my retirement fund. However, I can withdraw from my 457 without a severe penalty. In addition, I get a COL salary increase maybe once every two years, and my wife stays at home (see daycare and recent GRS post for that reason). I currently direct 10% to retirement and 5% in mutual funds, and 5% mixed to children’s college plan, and paying down student debt (it’s 3% interest, so Ramsey can say what he wants, it’s not a big hit).

So, I feel a bit like an old man (even though I’m in late twenties) afraid of new things, but I’ve always been told take advantage of the pre-tax advantage, especially when every dollar now counts, so how do I tell whether or not, Roth would be better?

If you expect to be in a higher tax bracket during retirement than you’re in now, a Roth is preferable. If you expect to be in a lower tax bracket in retirement than you’re in now, tax-deferred savings (such as a 457b, 403b, or 401k) is preferable.

If you have no idea how your tax bracket 30+ years from now will compare to your current tax bracket, it’s likely a good idea to do some of both.

There are exceptions of course. For example, if you were able to get an employer match, getting that match is generally priority #1. Or if think you might have to spend the money in the not-so-distant future, a Roth can be preferable (regardless of tax brackets) because you can withdraw Roth contributions free of penalty or tax at any time.

I agree. I also have a 457 (deferred comp) plan at work and I choose to max out my Roth IRA because I can choose better investments on my own.

My employer just initiated a Roth 457 plan this year, but I’m going to stick with the Traditional 457 because of your points #2 and #3.

Also, as Daniel mentioned, we don’t receive matching contributions in a 457. That’s why there is no extra incentive to invest in the 457 first. When I speak to people at work about this, I insist they max out their Roth IRA first and then fund their 457 with their remaining investable income.

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mikesays:

27 March 2012 at 8:56 am

1. Plus it makes a great back up emergency fund, if your emergency fund runs dry you still have the availability to pull your contributions,
2 plus you also get bankruptcy protection on the money if you don’t want to pull it depending on your financial issues,
3. and you never get those years back if you don’t contribute. Thats why I started allocating funds that would have otherwise going to emergency funds anyway.
4. It may be also better to put money into Roth for both you and wife instead of a 529 depending on your personal tax situation. Iras aren’t counted toward FAFSA, which mainly focuses on income and dependents. So you could increase your childrens potential for grants and aid while still saving full Roth up to 10k a year for both of you and if need be pull contributions for tuition. Obviously if you can max roths and 529 that would be good as well.

I have heard that IRA’s aren’t counted as heavily in college finacial aid, but I believe they count some. Any one out there with experience on this issue? We’re still 3 years away from college in our house.

We view our Roths as an additional emergency fund/retirement savings although they are also now our primary form of college savings. We stopped funding our 529 a couple of years ago. Instead, for the exact reasons you’ve listed, we’ve been fully funding our Roths when the laws regarding the conversion changed.

take a look at the account ownership chart to see how assets would count. The way I understand it,traditional IRA withdrawals would impact future years income, Roth contribution withdrawals would not since already taxed, but you have to be invested for 5 years in your Roth. (The chart breaks it down) There are also calculators on this website and on savingforcollege.com that calculate the Expected Family Contribution. They have basic ones and more complex calculators. The biggest factor tends to be Income and asset allocation. Child assets are assessed at a rate of 20%.Parent assets are assessed on a bracketed system, with a top rate of 5.64%. I have plugged in different numbers to get an idea, essentially if you are making six figures you have a much higher expected contribution regardless of your assets. The difference is quite huge actually

From Saving for collegecom
• 20% of a student’s assets (money, investments, business interests, and real estate)
•50% of a student’s income (after certain allowances)
•2.6%- 5.6% of a parent’s assets (money, investments, certain business interests, and real estate, based on a sliding income scale and after certain allowances)
• 22%-47% of a parent’s income (based on a sliding income scale and after certain allowances

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Mom of fivesays:

27 March 2012 at 7:36 pm

@Mike – very helpful website. Thank you!

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Juliesays:

29 March 2012 at 7:14 am

Am I understanding this beneficial Roth tax bracket theory wrong?

Your tax bracket 30 years from now will depend on how much you’re taking out of your retirement accounts per your retirement income- right? So you could take out the same amount that you’re making today, 30 years from now- ending up with the same amount of taxation regardless.

Then say you’re investing into your Roth with a high tax bracket per your income today, but expect to take less out per year upon retirement requiring a smaller tax bracket- thus having been taxed more at the today then you would tomorrow.

This entire post’s content is new to me so I very well could be misunderstanding the logic; please enlighten me.

I’ve had a Roth through Vanguard for three years. I’ve been pretty risk-averse: for the first couple of years I just invested in their STAR Fund, but this year I started buying the Emerging Markets Stock Index.

I’m a worrier. My husband and I had long been saving for retirement under the assumption that SS will be means tested by the time we retire and therefore we shouldn’t expect anything from it. However, I now see in Europe that some governments are taking private retirement funds from individuals.

Scares the heck out of me that it’ll start happening here so I’m trying to diversify our retirement assets as much as possible. We’ve got Roths and 401k’s but now we’re also trying to set a goal of an additional $6k a year in the stock market, but so far, we haven’t even come close.

I am curious as to the details of what you mean when you say “in Europe that some governments are taking private retirement funds from individuals.” If governments in Europe are confiscating private individuals’ investment accounts, I would think I would have heard about that. Maybe you mean they are in danger of defaulting on bonds?

I can see the logic that politicians will use – “401k’s and IRA’s were tax advantaged accounts so therefore the government has some claims on their funds.” And people who haven’t saved prudently will favor it. And that’s most people.

Logic and politicians? Isn’t that an oxymoron?
If it hits the fan there is probably isn’t anything thats off the table. 401ks and Iras(non-roth) are wonderful for future budgets because the haven’t been taxed yet, thus who knows what the future brackets will be and maybe they will tax pensions and other tax-deferred accounts at higher rates. So you are right to diversify, but whos to say they don’t come after Roths to capture additonal funds or raise capital gains and dividend rates to say 50%, we just don’t know and I guess that can cause consternation. I try to spread it around like you, munibonds, roth, 529, 401k, cash, Reits, etc.. Don’t worry about the 6k a year in the market, your better off just wanting till the next correction and buying then, it will come.

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Johnsays:

27 March 2012 at 9:49 am

Wow, thanks for the link. That *is* scary. Makes me see the following story in a new light.

I’ve thought of that, too. I’d be an absolute moron to think that I’ll get social security when I retire (in my mid-twenties), at least in its present form. WIth the US owing some 12-13 trillion dollars (?), I think it’s quite possible that they’d dip their hands into my IRA accounts. Just like you said, most people don’t save, and they’ll be the ones voting in the politicians who say that they’ll tax IRA (even Roth IRAs) to help pay for the things that non-savers can’t afford.

I bought some physical gold. I see it as the future money, and that inevitability isn’t priced in yet, and it’s definitely not priced in in terms of US dollars. I guess property may be a good thing to own for when we default on our debt (or print our way out of it with massive inflation to follow). If you read Michael Lewis’ Boomerang, maybe listen to Kyle Bass, a hedge-fund manager who saw not only the housing crisis, but the sovereign debt crises coming. He said that he would tell his mother to buy “guns and gold.” Scary.

Since I don’t trust my IRA (even Roth) to be free of later taxes, I’ll buy more gold, property, and maybe guns to protect what I own. Another housing-sage invested in water by buying almond farms (irrigation rights). It’s scary that the same people who predicted the housing crisis are now predicting a sovereign debt crisis, including in the US. Perhaps once they get that concept of toxic debt in their mind, they can see it other places. Very scary, and certainly makes sense.

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Mikesays:

27 March 2012 at 7:26 am

It’s no guarantee that you won’t pay anything after you retire. There’s no stopping congress from changing the rules and taxing your gains in the future.

This is a very good point. I cringe when I hear coworkers say things such as, “They could NEVER take our pensions away!”. Pension plans change or disappear. Tax codes change almost yearly. Marginal tax rates go up and down. Interest rates flucuate daily. Returns on stocks and bonds ebb and flow. The government could one day decide, “Hey we need more money. What could we do?? I know… let’s require all Roth IRA holders to pay 15% tax on their withdrawals” Ergo… DIVERSIFY!

The $5,000 annual contribution limit, however, is a total contribution limit. So, for instance, you could contribute $2,000 to one and $3,000 to the other, but not $5,000 to each.

And, a Roth IRA is not necessarily better than a traditional IRA. It depends on a few factors — the most important one usually being how you expect your tax bracket in retirement to compare to your current tax bracket.

So many people whine about how they don’t get the immediate tax deduction with a Roth IRA. Take it from me, you will be happier with the tax-free withdrawals later in life that with the tax deduction now!

I agree. I handle my parents finances now and wish they had a source of tax-free income. People need to remember the other benefits of having tax-free income.

When you are in retirement, having tax-free income means that you have better chances of qualifying for low-income benefits if you need it. Removing taxable income will mean a lot more for you later in life than a small tax deduction now (remember that it’s a deduction, not a credit).

My husband and I are just barely over $173K (though it certainly doesn’t feel like it because of our oppressive student loan debt)- does anyone have any thoughts on what the best option for us would be? Thanks!

That question is very hard to answer without knowing more about your entire life situation. From your initial description, my wife and I are pretty much in the same pot as you.

In order to reduce some of our taxable income now, my wife invests 5% of her income in the regular 401k plan at work (it’s enough to capture the employer match). She also has a Roth IRA for tax-free income later in life.

I also do the same, but with a 457 plan at work and a Roth IRA on my own. We are concentrating heavily on paying off debt now. Once we have her student loans paid off, I intend to increase our contributions employer sponsored plans (the 401k and 457) to the max every year.

Because of our income, we can’t deduct a Traditional IRA anyway (nor contribute directly into a Roth), so that is something to consider. Because there is no benefit for us to keep our money in a Traditional IRA, we open one every year and convert it immediately to a Roth IRA.

Wow- this is very informative- thank you! Currently we’re just dumping as much as we can into our 401(k)s, because we weren’t sure what else to do with it. I’m contributing 10% (+ a 4% match) and my husband contributes 10% (+ an 8% match). We are also agressively trying to pay off the student loan debt (over $250K I cringe to say), so we don’t have much more wiggle room to contribute. I sensed putting it in all in the 401(k)s wasn’t the best option, so I really appreciate your advice! Thanks again!

There was a spreadsheet that I came across on the web once. My thought initially was to pay off the loans first then invest. I sure was wrong. Even though I would be paying almost 47k in interest the difference between paying my loans off early (3 years) vs waiting the full 20 was about 70k at 7% growth.

The motivation is, assuming you retire when you’re 65 (47 years of investment), that if you invest nothing but that initial $250 (at an assumed, but attainable 7.0% return) it will become $3,782 in the future.

If you only can afford to add $250 a year, because of compounding, it will become $66,669 when you retire at 65.

That’s the beauty of the Roth IRA. The magic of compounding gets to work hard for you for many years and is not penalized when you need to withdraw it for income.

It’s funny that in Home Economics, you’ll learn how to bake a cake, but not how to calculate the cost of interest, or how mortgage amortization works. Why isn’t personal finance a standard course in high school yet?

I remember that in high school, the “practical finance” courses were only taken by kids who weren’t on a college prep track. I never did need trigonometry or calculus after high school, but those practical finance classes would have been useful!

An important point about the Roth IRA being taxed now rather than later (which I’m surprised JD didn’t stress more) is that you have to think about your tax bracket. I’m young, and I make dog poo for income. So, I prefer a Roth IRA to a traditional IRA because hopefully and realistically, I’ll be in a higher tax bracket once I start withdrawing from my IRA. That way, my taxes will be effectively lower going in than coming out. I’d rather pay the tax now on my puny income than later on my… well, less puny income.

Ok, stupid question here…
Can someone tell me the benefit of a scottrade Roth IRA account vs a standard brokerage Scottrade account? I have both but don’t see how they are taxed any differently.
thanks.

I don’t have a scott trade account, I’m with Vanguard and I have roth, ira, and brokerage with them. The roth account should be tax deferred, no tax implications unless you withdrawal earnings. A regular brokerage account would be subject to all regular taxation rules on dividends, captial gains, write-offs on losses,etc..

What of the great things about Roths is that if are you in the lower income bracket, you can receive a very generous tax credit. For example, if you are single and make less than ~27k (as of 2011), you can receive up to 50% of 2000. So, if you put 2k in a Roth you will receive a 1,000$ check.

I was looking forward to doing this, however, if you are a full time student you are illegible. As nice as this credit it, it is not very practical. If someone is single and making less than 27k a year, it is not likely they have 2k to spend. I think the limit for a married couple is 54k.

So can anyone knowledgeable please explain how IRAs are handled between spouses? Since “individual” is part of their name, I assume you can’t have joint agreements, then? Can my spouse draw from my IRA tax-free if I croak? Can my IRA survive me and keep growing tax-free?

The rules are different depending on whether we’re talking about a traditional IRA or a Roth IRA.

If you die and your spouse is the listed beneficiary of your traditional IRA, she would have two options.
1) She can roll the IRA into her own IRA, or
2) She can treat it as an inherited spousal IRA. Inherited spousal IRAs have different required minimum distribution rules than regular IRAs. But the good news is that money can come out at any time without the 10% penalty.

If you die and your spouse is the listed beneficiary of your Roth IRA, she would again have two options:
1) Treat the Roth as her own Roth, or
2) Treat it as an inherited spousal Roth IRA in which case required minimum distributions will begin in the year that you would have reached age 70.5 if you were still alive.

A person can have as many Roth IRAs as he/she wants. So, the fact that she already has a Roth would not prevent her from treating an inherited Roth IRA from you as her own Roth IRA.

An inherited Roth IRA continues to grow tax-free for as long as the money is in the Roth. (Of course, the required minimum distributions work to move money out of the Roth.)

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El Nerdosays:

27 March 2012 at 12:14 pm

oooh! brilliant. that about answers it all. thanks!

and i’ve been looking at your website too. good stuff!

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Jasonsays:

27 March 2012 at 11:25 am

I use Vanguard for my Roth. I’m still young and don’t make much money, but I am planning to max it every year. Right now I invest in a target-date retirement fund (year 2050) that automatically rebalances and essentially lets me sit back and watch. It’s 90% stocks and 10% bonds, and I think about 63% U.S. stocks and 27% international. I handle risk well!

I’m the same way, I love the target funds at Vanguard. I just put money in, pick a rough retirement time frame (this helps them calculate the risk level of your investments) and then stop worrying about it. I know some folks like learning about individual stocks and such, but I find all of that intimidating and prefer the Target funds.

I’m going to sound like a Vanguard shill, but, as a young person just starting her investments, their customer service has been awesome at explaining everything and not making me feel like an idiot. Just my 2 cents for any other young folks that might feel too intimidated to get started!

I do Love Vanguard and I’m in similar boats as you both. Vanguard has an awesome site as well as customer service, and while I used to have my Roth going to a target retirement, I moved them recently because their 5 or 10 year averages (where available) were significantly enough less than other index funds. Having said that, Target retirements are excellent for automatically modifying (reducing) your risk as you get older. Pick a few funds and track them in comparison to your target retirements. .5 or 1% might not seem like much, but compounding adds up.

I have a Traditional IRA with $3k (rollover from previous job) and a SIMPLE IRA with $8k that I contribute $200 to each month, and my employer matches with an additional $100. My husband received an inherited IRA with $400k in it last year. We are both young (26 and 31) and have no kids. I want to go back to school soon, and I’m considering draining the $11k in my IRAs to pay for tuition in cash. I believe I will need to pay taxes on the withdrawal, but no penalty since it’s for qualified education expenses. Is this a good idea? Also, what about cutting back my contribution to the minimum level to get the maximum matching contribution ($100 instead of $200 per month) while I’m in school to free up some monthly cash for books and supplies. Any advice is appreciated!

Roth IRAs are amazing creatures – they are the reason why I’m a home owner at 29 in a high real estate price area. I threw almost everything I earned in high school and college into it to max out the contribution limit thanks to my parents who covered college and livings expenses. I kept it up at my first job when I made starvation wages except for the years I had tens of thousands in unreimbursed health expenses thanks to United Healthcare (aka the evil empire).

Now that I cleared the pot for my 20% down and I save 10% in my work 401k, I’m trying to evaluate if I should just use the Roth as my 10% savings pot for everything else beyond my or just limit it to what I can afford to lock away for retirement. Yes, you can always take the earnings out…

I’m surprised how many people predict they will be in a higher tax bracket in retirement. I thought the whole point of retirment was to have your house, student loans, and everything else paid off so you can live on less. Are people planning to retire super rich or am I missing something in the tax code?

Having watched various elderly relatives go through retirement, getting older and frailer is VERY VERY expensive. Even if you are relatively healthy, insurance premiums, copays, medications, etc are all expensive. The majority of the elderly spend several years requiring either a nursing home or in-home care. I’ve seen and smelled the ones medicaid provides and I would never do that to myself or a relative. In CA, good assisted living starts at $5000 a month and the cost will only go up. Want to do in-home care? Be prepared for 10 times that.

Your taxable income is used as a means-test for MANY programs, housing, etc as a senior. If all of your income aside from Social Security is non-taxable as a senior in retirement, you are more likely to qualify for things you may not be able afford without the subsidies or may not be as good. For example, you may need to be in a nursing home but the best one in the area is run by a non-profit and you must pass a means test. Guess what, that Roth IRA income won’t be counted.

Secondly, income tax rates across all income levels are HISTORICALLY low by ten to twenty percent for many brackets. Even if you are within 10 years of retirement and think you are making the most you will ever make, chances are you are paying less income tax now than you will pay in retirement once taxes rise to pay for the massive deficits run up in the 2000s.

This is the first somewhat convincing argument I’ve heard on the subject. However, I’m skeptical… or let’s say curious, about means-testing for middle income seniors. What programs are we talking about?

I’m a social worker and very familiar with Medicare and Medicaid, and I worked in a Medicaid nursing home. When you talk about Medicaid you’re talking about having income less than $10,000/year and no more than $2000 in assets… I don’t think any of is is planning to be in that boat.

I work with disabled people and they have by and large been very poor, so I’m not familiar with higher incomes. What’s something a senior can qualify for with $40k of taxable income but not $60k?

The affordable senior rental housing in my town follows these guidelines. The religiously affliated non-profit who owns my grandmother’s assisted living home is giving her a 50% scholarship so she can stay longer as she spends her assets down thanks to them being in a Roth IRA. I agree that it’s not advantageous for medicaid means testing, but many non-profits and local governments discount or ignore Roth IRA assets as they are focused on current income. As long as your Roth has been spent down a bit from where you started when you are in the last few years of your life like she is (over 90), it can help with programs aimed at the upper middle class and middle class who have outlived their savings.

Good point, Sarah. But the way I look at it is that I’d rather get my taxes out of the way now. I’d like to have some income from investments during retirement, like dividends and fixed-income securities. I would hate for those sources of income to put me at a higher tax-bracket, and make more of my IRA go to the IRS. In other words, if I invest wisely now, it’s quite possible, and hopeful, that my investment-income during retirement will put me in a higher tax bracket. When I retire, I’d like to have some discretionary income to travel abroad with my wife and kids, pay for my children’s educations, etc. In order to do those types of things, I’d need to realize some income. By realizing that income, I’ll put myself in a higher tax bracket, which will cause more taxes to be taken from my traditional IRA.

Bottom line: I’d rather pay the taxes now and get them over with. I don’t want to have to worry about being in a high tax bracket when I retire.

My thought (and I’m not as knowledgeable as some of the other folks that replied), was that I’ll be working long past the current “retirement age” designated by the government. I’m in my mid-twenties and am fairly confident that SS will be gone or fairly reduced by the time I’m in my 60s, so I bet I’ll be working at least into my 70s. Because of that, I’ll hopefully still be at that top bracket for income. Other folks talked about a lot of tax stuff, but that was the reason I was going with Roth.

I started a Roth IRA when I was 17. I have it invested through Edward Jones. I have a family member who works there, so some mutual fund transactions are free for me. I haven’t contributed much over the years due to college. I currently have it invested between 3 mutual funds.

I used to work at Edward Jones, and I don’t remember this being possible, so your post has me very curious. Would you mind sharing which mutual fund transactions are free for you? I’m interested to see if anything has changed.

When I worked there, there was no way to have the sales load on a mutual fund waived. (In fact, I was under the impression that it’s not legally possible because the sales load is set out in the prospectus.)

Of course, switching funds within the same fund family doesn’t incur a sales load, but that would be the case regardless of whether the client is a friend, family member, or total stranger.

My ridiculously fiscally responsible youngest brother opened a Roth IRA when he was 15 and got his first job as a life guard. He also paid cash from savings for his first job. The local Edward Jones office said he was their youngest client ever. Yay him!

On the other hand, I finally set up a Roth IRA for myself last year, at the age of 33. It’s at TD Ameritrade, mainly because numerous family members have their retirement accounts there and it makes it easier for my retired dad to keep an eye on all of us (and we’re grateful for the help). Their site is very…meh. But call them up, 24/7, and you get amazing customer service. Trades are $10, and funds/bonds vary. Some don’t cost anything if you buy enough, or hold them for a certain period of time.

I’m following the stock to bond ratio formula of 110-current age for % stock holdings, the rest in bonds. In order to have the most invested for the year (and thus potentially growing and reaping dividends), I’ll max out the Roth by May.

To get money into the Roth, I have recurring transfers set up each pay period, but I also “rebalance” my checking account every pay period, and alternately throw anything above x amount into my Roth or into savings. This typically at least doubles my planned contribution rate every month. It’s all about mind games.

I contribute 15% of my gross salary to my 401(k) and get a 2% employer match. Once the Roth is funded, I’ll increase that contribution rate until it’s maxed out for the year, then put all other excess into savings.

One thing I’m not sure I saw mentioned is the spousal IRA. Even though I no longer have earned income, I contribute $6K per year to a Roth as does my employed husband. So if you’re a one-income family, the non-working spouse still can contribute to a Roth IRA.

Quick question: I already filed my taxes for 2011. If I opened a Roth IRA now (prior to the April 17 deadline) to contribute for 2011, will I have to re-file any tax forms, or modify anything on my 2012 returns?

No, you shouldn’t have to file an amended return or submit anything additional. Roth IRA contributions don’t normally go on your tax forms when you file (the contributions aren’t deductible and don’t effect your tax owed/refunded — that’s part of what makes it a Roth instead of a regular IRA!).

I have kind of an offbeat Roth question. My (separated) husband has a Roth that was converted from a traditional IRA (and taxes paid) up over 20yrs ago. He is unemployed and seriously in need of some cash right now. I know that he can withdraw his initial contribution w/o any penalty, but … this fund has taken a beating over the last few years and is actually worth less now than the converted amount. So, if he liquidates it and takes all the money now, could he also claim an investment loss on his taxes for the difference?

I am almost 30, a seasonal worker who makes under 40K in the tourism industry doing what I love. I owe nothing, own everything outright (which isn’t much, but I don’t need much as I’m more of a minimalist) and have very little overhead which makes me actually feel rich with the little amount that I make. I don’t see myself ever making LOTS of money but possible more than this in the future. Should I start a Roth IRA through ING who I already have accounts with? It would only really be cash that I would be adding every year. Is this a good idea? Thanks…

I have a little over 12, 000with edward jone I was put out of work on total disability. I owe over 30, 000 in cridit cards. However , I’ve checked my credit my cedit and it most accounts are closed.
My questions are 1) can I file bankruptcy and 2) am I suppose to file taxes on money with edward jones? 3) I am only on SS making 1220 a month.
If I file bankruptcy and them that I have no money anywhere but SS . Will the bankruptcy people find out I have money at edward jones and will my money in that account be taken away to pay some of my credit cards? My mom is beneficiary on my edward jones account.

Hi i have a friend that told me that I should open a ROTH account since he said I’m still young 33 years old. He told me if I open one ROTH account and I put up between five or ten thousand in the account my gains can be pretty good per year. I wanted to know or ask if you can advise me more about this topic and if you can give me an example of my gains if I open an account with 5000 or 10000 dollars. Can I keep making deposits once I open the account? can you advice me more options or best cash amount that I should use to open an account please. Thank you for you time and help. Gus zuniga.

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